Bitcoin is a cryptocurrency developed in 2009 by Satoshi Nakamoto, the name given to the unknown creator (or makers) of this virtual currency. Transactions will record in a Blockchain that shows the transaction history for each unit and proves ownership. In this article, we will talk about what determines Bitcoin Price USD.
Unlike investing in traditional currencies, bitcoins are not issued by the central bank or supported by the government. And buying bitcoin is different from buying stocks or bonds because BTC is not a company. As a result, there is no balance sheet or 10-K form to review.
Understanding What Determines Bitcoin Price USD
Unlike investing in traditional currencies, Bitcoin is not issued by a central bank or backed by a government; therefore, the monetary policy, inflation rates, and economic growth measurements that typically influence the value of currency do not apply to Bitcoin. Conversely, Bitcoin prices influenced by the following factors:
- The supply of Bitcoin and the market’s demand for it
- The cost of producing a bitcoin through the mining process
- The rewards issued to Bitcoin miners for verifying transactions to the blockchain
- The number of competing cryptocurrencies
- Regulations governing its sale and use
- The state of its internal governance
- News developments
What Determines Bitcoin Price USD: Supply
The supply of an asset plays an important role in determining its price. A scarce asset is more likely to have high prices, whereas one that is available in plenty will have low prices. Bitcoin’s supply has been dwindling since its inception. The cryptocurrency’s protocol only allows new bitcoins to be created at a fixed rate, and that rate is designed to slow down over time. Thus, the supply of Bitcoin slowed from 6.9% in 2016 to 4.4% in 2017 and 4% in 2018. Bitcoin halving events, which occur every four years, generally correspond to a significant bump in its prices because it means that the cryptocurrency’s supply has been reduced.
What Determines Bitcoin Price USD: Demand
While Bitcoin is not yet popular as a medium of exchange, it has attracted the attention of small investors. The source of bitcoin demand varies based on economic and geopolitical considerations. For example, Chinese citizens may have reportedly used this digital currency to circumvent capital controls in 2020.
Bitcoin has also become popular in countries such as Venezuela with high inflation and declining currencies. It is also popular with criminals who use it to transfer large sums of money for illegal activities. Finally, investor demand for digital currency has increased with increasing media coverage.
All this means that the decrease in supply is accompanied by an increase in demand and acts as a fuel for the Bitcoin price USD. Intermittent periods of boom and bust have become a feature of the digital currency ecosystem. For example, the rise in bitcoin prices in 2017 was accompanied by a long winter.
What Determines Bitcoin Price USD: Cost of Production
Just like other commodities, the cost of production plays an important role in determining the price of bitcoin. According to research, the price of bitcoin in crypto markets is closely related to the final cost of production.
For Bitcoin, the cost of production is almost the sum of the direct fixed costs of infrastructure and electricity required to mining digital currency, and the indirect cost is related to the difficulty level of its algorithm. Bitcoin cloud mining consists of miners competing to solve a complex math problem—the first miner to do so wins a reward of newly minted bitcoins and any transaction fees that have accumulated since the last block was found.
Achieving a solution to the problem requires brutal force in the form of considerable processing power. In monetary terms, this means that the miner has to spend his money on rack mining machines equipped with expensive processors. The bitcoin mining process also entails costly electricity bills.
According to some sites, the power consumption for the bitcoin mining process is equal to or greater than all countries. The indirect cost of bitcoin mining is the difficulty level of its algorithm. Different levels of difficulty of bitcoin algorithms can accelerate or reduce the speed of bitcoin production and affect its overall supply and thus its price.
What Determines Bitcoin Price USD: Competition
Though Bitcoin is the most well-known cryptocurrency, hundreds of other tokens are vying for crypto investment dollars. As of 2021, Bitcoin dominates trading in cryptocurrency markets. But its dominance has waned over time. In 2017, Bitcoin accounted for more than 80% of the overall market capitalization of crypto markets. By 2021, that share was down to less than 50%.5
The main reason for this was an increase in awareness of and capabilities for alternative coins. For example, Ethereum has emerged as a formidable competitor to Bitcoin because of a boom in decentralized finance (DeFi) tokens. Investors who see its potential in reinventing the rails of modern financial infrastructure have invested in ether, the cryptocurrency used as “gas” for transactions on its network. On Oct. 13, 2021, Ethereum accounted for almost 18% of the overall market cap of cryptocurrency markets.
Even though it has siphoned away investment dollars from the Bitcoin ecosystem, competition has also attracted investors to the asset class. As a result, demand and awareness about cryptocurrencies have increased. As a standard-bearer of sorts for the cryptocurrency ecosystem, Bitcoin has benefited from the attention, and its prices have surged.
What Determines Bitcoin Price USD: Regulatory Developments
Bitcoin was released after a financial crisis caused by the reduction of regulations in the derivatives market. The digital currency itself remains largely uncontrolled and known for its borderless ecosystem.
The lack of regulatory status of Bitcoin has advantages and disadvantages. On the one hand, the lack of regulation means that it can be used freely across borders and, like other currencies, is not subject to government-imposed controls. On the other hand, this means that the use and trading of bitcoins can have criminal consequences in most jurisdictions. The vast majority of institutional investors are still cautious about placing their money in the asset class, resulting in less liquidity and more volatility for its ecosystem.
El Salvador legalized bitcoin on June 9, 2021. This is the first country to do this. Digital currency can use for any transaction that the business can accept. The US dollar remains the main currency of El Salvador.
The more governments around the world introduce bitcoin into their economies and markets, the better their chances of becoming a legal asset class for investment. Digital currency investors and traders are closely following Bitcoin-related regulatory developments, as it is an indicator of liquidity in cryptocurrencies. These developments put pressure on its price because it affects its supply and demand.
For example, China’s measures to ban bitcoin trading and restrict bitcoin mining infrastructure operations affect the supply and demand of digital currency.
In the United States, digital currency rulings issued by the Securities and Exchange Commission (SEC) often have a direct impact on bitcoin prices. For example, in October 2021, the price of Bitcoin reached over $ 66,000, the day the SEC allowed the first US trade to be issued.
What Determines Bitcoin Price USD: News Developments
Bitcoin’s nascent ecosystem means that news developments have a direct impact on its price. These developments can be of various types.
As mentioned earlier, regulatory news can move the cryptocurrency’s prices substantially. Hard and soft forks, which alter the number of bitcoins in existence, can also change investor perception of the cryptocurrency. For example, the forking of Bitcoin’s blockchain into Bitcoin Cash in August 2017 resulted in price volatility and spurred the valuation of both coins.
Bitcoin’s governance policies, which set by a group of core developers, also affect its price. Protocol modifications that alter the number of bitcoin in existence or philosophical disagreements among developers about the cryptocurrency’s future direction closely watched investor indicators.
What is the price of one bitcoin?
The price of one bitcoin will determine by several factors, including supply and demand, competition, and its regulation. News developments also influence investor perception about cryptocurrency.
The intrinsic value of one bitcoin can be estimated by computing the average marginal cost of production of a bitcoin at any given point in time, based on the block reward, price of electricity, energy efficiency of mining hardware, and mining difficulty. On Nov. 10, 2021, bitcoin reached an all-time high of $68,790.
Will Bitcoin’s price increase?
As Bitcoin nears its maximum limit, demand for its cryptocurrency will suppose to increase. The increased demand and limited supply push the price for a single bitcoin higher. Also, more institutions are investing in Bitcoin, stabilizing its markets and making it popular as an investing tool. If bitcoin cryptocurrency becomes popular as a tool for retail transactions, its utility and price will also increase.
How does bitcoin supply affect its price?
Since the introduction of Bitcoin in 2009, its bitcoin supply has been declining. Every four years, the cryptocurrency undergoes a halving event during which miner rewards reduced by half on average. The decrease in supply relies on the increase in demand due to media coverage and price fluctuations. A combination of declining supply and rising demand has led to higher bitcoin prices.
How are bitcoin production costs related to its price?
According to research, the bitcoin market price closely relies on its marginal cost of production. The breakeven costs for bitcoin mining vary based on the price of mining equipment and electricity.
How does Bitcoin make money?
Unlike stock, Bitcoin does not represent ownership in a company or entity. Owning Bitcoin is like owning digital currency, much like owning $1 is like owning the paper currency. Bitcoin holders make money as the price per coin increases. For example, if you purchased 100 coins at $65.52 on July 5, 2013, and held it until its all-time high of $68,790 on Nov. 10, 2021, you would have $6,872,448.
Although bitcoin has been around for more than a decade, it is still a nascent asset class. This means that its price determined by a complex combination of factors, including production costs, competition, and regulatory developments. The technological roots of this digital currency mean that other factors, such as the difficulty levels of algorithms and its forks in blockchains, can also play an important role in determining Bitcoin Price USD.